Tech giants are wielding their significant resources and market dominance to reshape the financial landscape, introducing innovations that disrupt traditional banking models.
In this article, finance commentator Igor Pejic, an expert on tech-driven shifts in banking and finance, delves into the specific actions and strategies employed by these tech giants that are causing ripples in the financial industry.
Some 10 years ago, EU lawmakers started to take issue with the stale world of payments, which had seen little innovation since the introduction of credit cards. The position of banks, payment processors and credit card companies was so entrenched they lacked any incentive to harness new innovation.
Hence, in 2015, the European Parliament passed the second payment services directive (PSD2) to increase competition in consumer finance by unbundling financial services. This meant that every bank had to share its interfaces with any other licensed and authorised player, whether that be another bank or a fintech company.
Dominating firms could no longer lock their customers from their competitors. If I wanted a fintech to show me how much I spent on clothes, I could load my bank data into their application. If I preferred to use PayPal when purchasing a new laptop, the bank couldn’t stop me from linking my card to my PayPal account.
Rise of open banking
The idea of open banking rapidly spread across the globe – either driven by regulators like in the UK or driven by the market as in the US. The trend unleashed a worldwide fintech-wave that has made financial services cheaper, more easily accessible, and brimming with new features.
Recently, a move by Apple revealed the perils of open banking. The company rolled out a new feature called ‘Connected Cards’ to iPhone users in the UK. The Apple wallet can now display the account balances and the transaction history of a user’s banks and credit cards. No need any more to log into your Barclays or HSBC app to check if your salary has arrived.
The feature seems unspectacular at first sight. After all, there is an entire fintech category called ‘personal finance managers’ dedicated to doing exactly that: bundling data from other banks in one app. This is a prime example of what open banking advocates had envisioned, so why bother that Apple Pay now offers the same functionality?
Who uses the open banking interfaces makes all the difference. Apple’s scale will worry banks, but truly troubling is the company’s gatekeeper function on your phone. Apple and Google share a duopoly on mobile operating systems. Thus, they write the rules for whatever happens on your phone and they can restrict any app’s access to the hardware at will.
Google has not yet done so, but Apple has. If you are an iPhone user, no chance to pay for your groceries via your PayPal or Venmo app. Apple will block their payment feature from accessing the phone’s NFC chip, i.e. the chip that enables the phone to talk to the payment terminal.
Sure, customers could opt for payment apps that use QR-codes, but those are less secure and not as accepted by Western retailers. So, if you want to ditch the plastic in your physical wallet, you must go with Apple Pay.
Forcing banks to open up their interfaces and share their customers’ data has eliminated many entry barriers to banking. Paradoxically, Big Tech is using that unlocked door to muscle its way into financial services, while at the same time locking another door for everybody else.
In the US, Apple therefore faces a private antitrust lawsuit. Banks and credit unions mourn that the tech giant charges them at least $1billion in excess fees. More importantly, the practice also hurts consumers. It hampers innovation and eliminates competitive markets. Not to mention that getting the hands on their users’ complete banking data gives Apple an unsurmountable advantage over banks and fintechs.
In fact the pressure in an EU antitrust case got so intense that Apple has promised to grant rivals access
to the iPhone’s NFC chip. It is yet unclear what exactly Apple’s proposal contains, whether the EU Commission will accept it, and how it will impact Apple’s strategy in non-EU markets.
Whether this obstructive practice is tolerated will shape the future of the entire retail-banking segment, not just payments. Apple Pay has recently introduced a savings account, taken the first step into the lending businesses by letting users pay in instalments, and reportedly worked on an investment feature.
Some have suggested to bar Big Tech from the open banking ecosystem altogether. This would be wrong. Much of our digital age has been built by American tech giants. In fact, even the payment enthusiast among us would still be tapping plastic cards onto terminals if it hadn’t been for Apple and Google. Rather, Big Tech’s gatekeeper function must be regulated to ensure fair and open competition.
The German effort dubbed ‘Lex Apple Pay’ could serve as a blueprint. In 2020, legislators forced the Colossus from Cupertino to grant other companies and banks direct access to the NFC chip. For such crucial interfaces, regulatory action is the only way to level the playing field and ensure efficient competition.